Professor Porter's diamond model spells out five forces explaining why some countries, industries and also firms are more competitive, while others are not. These forces are i) bargaining powers of suppliers, ii) bargaining powers of buyers, iii) threat of substitution, iv) threat of new entrants, and v) industry rivalry. Developing countries, so far, have used low-cost labour advantage, tax differential, and also cash subsidies to counter these forces. But due to eroding labour advantage, primarily driven by technology progression, such measures are getting weaker day by day. Moreover, investment in infrastructure is also reaching saturation. For example, despite lowering corporate tax, expanding cash subsidies, and improving infrastructure, manufacturing firms in Bangladesh lately shrank. A study finds that the number of medium-sized industries in Bangladesh declined by 51 per cent over seven years, reaching 3,014 units in 2019 from 6,103 in 2012. The number of large firms has also declined during the same period.
Attaining the capability of offering better quality products at lower cost appears to be a core competence to address competition forces as outlined by Prof. Porter. One of the strategic options in addressing these conflicting variables, higher quality at a lower cost, has been to keep adding intellectual assets to the product and also the processes in producing them. We have been using the same type of raw materials, but by adding a growing amount of knowledge to them, we are creating increased wealth. This strategy has been at the core of advanced countries' capability to keep succeeding with the industrial economy. It's the challenge for developing as well as countries graduating from least developed country status (LDC) to attain this capability. To achieve this capability, it does not necessarily mean to keep increasing intellectual assets by making publications and filing patents. The purpose is not just producing those assets. Adding IA to products and processes for improving quality and reducing costs is the ultimate purpose.
To capitalise on the IA strategy, developing countries should address a number of challenges. The first one is about creating the management capacity for leveraging IA. Often, they are used to import labour saving IA intensive capital machinery to counter pressure of competitiveness. But such measure neither opens the opportunity of creating quality jobs for producing IA nor does it offer a unique competitive advantage in the globally connected value chain. On the other hand, dearth of skilled human resource to undertake industry focus R&D becomes a serious bottleneck. To address this HR issue, it appears that local academic institutions are not of much help. The limited research capacity of universities is primarily engaged in undertaking academic research, often having no relation to local industrial challenges. It's also disappointing to observe that public R&D institutions, such as Bangladesh Council of Scientific and Industrial Research (BCSIR), are primarily involved in undertaking research for the purpose of inventing technologies and innovating new products. As a result, both academic and government's research laboratories are neither producing IA for addressing the industry's challenges, nor are they developing a competent HR pool for undertaking industry-focused R&D activities.
Here are a few strategies and policy options for strengthening both the demand and supply of IA for addressing the competitiveness issue. The first one is to demonstrate that local capacity could be developed to produce and integrate IA to products and processes. As a result, existing productive activities succeed in improving the quality and reducing the cost simultaneously. And this demonstration should be done in partnership with the industry and academic research capacities. Upon doing so, the government should give an unambiguous signal to the industry that conventional incentives such as tax preference and cash incentives will gradually be phased out. Instead, incentives should be expanded for encouraging research facilities to undertake collaborative R&D to address the competitiveness issue through adaptation, production and integration of intellectual assets. Once the model of R&D investment in producing IA and turning it into profitable outputs is fine tuned, incentives should be given to firms to develop their corporate R&D capacity for addressing competitiveness; it does not matter whatever they produce.
It's worth mentioning that Korea's success in the industrial economy has been due to very careful government's strategy and policy intervention in creating the local market of IA. Although the process started in the 1960s with mostly government finance, the success of turning R&D investment into profitable return has been encouraging the industry to grow its share. For example, private firms are now making almost 90 per cent of the massive R&D investment, reaching 4.3 per cent of GDP. Such success has not only been creating a sustainable industrial base, but most importantly, it has been creating an increasing number of quality jobs for science, engineering and management graduates. Similarly, Japan's initial success of replication has been extended to innovation, and also in the invention, by creating the institutional capability of producing and integrating IA.
Upon graduation from LDC, newly emerged developing countries will be deprived of many preferential trading agreements. On the other hand, the emergence of higher-level automation during the fourth industrial revolution is rapidly reducing low-cost labour advantage. Amid such a challenging reality, intellectual asset-based capacity development for addressing competitiveness in the globally connected value chain appears to be the only option. Unfortunately, significant stakeholders like the government, Industry, higher educational institutions and research establishments of these countries do not have the track record of creating the IA market to keep driving the economic growth. To address this void, investment in education or research alone will not be sufficient.
Creating the local market of IA for addressing competitiveness in the global value chain is a success of the developing countries for driving growth. Moreover, such a success is going to create high paying quality jobs for their growing number of university graduates. On the other hand, acquiring such a unique capacity will be accelerating the expansion of industrial economy offsetting labour-intensive job loss. Unfortunately, conventional approaches will likely not succeed in creating this vital capacity. It's time for developing countries to focus on creating very clear insights about what it takes for creating the local market of IA for driving the industrial economy and creating quality jobs. It is worth mentioning that such a capacity is crucial for continued growth, avoiding income traps, and for offering quality jobs.
M Rokonuzzaman PhD is an academic and researcher on technology,
innovation ands policy. [email protected]